Emerging Markets Set for Better Times in 2015

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From emerging markets to the most competitive, developed economies in the world, it’s mostly been a brutal year for anyone investing outside of U.S. equities. Happily, market strategists see better times ahead for emerging markets in 2014.

Globe emerging markets eemThe great economic and intentional slowdown in China ended the super-cycle of rising prices for commodities, and that robbed many emerging markets of their key growth drivers. Add in political and geopolitical crises from South Africa, Indian and Russia, and emerging markets have been a loser this year — with tremendous opportunity costs too.

After all, the iShares MSCI Emerging Markets (EEM) is down almost 2% for the year-to-date. That performance lags the S&P 500 by almost 13 percentage points.

True, many global markets looked terrible this year, hurt by Europe flirting with a triple-dip recession and the crisis between Ukraine and Russia. The DAX — Germany’s equity benchmark — is just shy of breakeven in 2014. The French CAC 40 is down about 1.5%, while the U.K.’s FTSE 100 is off 1%.

Meanwhile, although emerging markets are supposed to offer outperformance to compensate for their extra risk, that sure didn’t apply in 2014. But as the 2015 outlooks trickle in from Wall Street market strategists, one theme that emerges is a rebound for emerging markets.

A host of factors should help emerging markets enjoy a better 2015. The huge drop in energy prices put a lid on inflation in these fast-growing economies. And external imbalances that have plagued India and other nations have gotten better, note strategists at Goldman Sachs.

Emerging Markets on Sale

Perhaps most importantly, emerging markets are much cheaper than U.S. stocks, which are headed toward their sixth year of a bull market. As strategists at T. Rowe Price note:

“Emerging stock markets, which have underperformed developed markets since 2011, have more compelling valuations, and the structural growth evident in many frontier markets continues to be underpriced.”

To be sure, not all emerging markets are equal. Indeed, those that are highly dependent on external demand (cough, China) could be in for another year of disappointing performance. On the other hand, emerging markets with stronger domestic drivers — or those closely tied to the U.S. — should come back next year. Here’s T. Rowe Price again:

“World trade has been decreasing in the years since the global financial crisis. As countries have become more insular, domestic factors will be more likely to drive financial markets going forward.”

Of course, none of the emerging markets are completely divorced from global trade. And even if they’re not dependent on a pipeline of commodities to China, there are always trickle down effects. But countries with rapidly increasing domestic demand, such as Colombia and Indonesia, among other nations, should put up better equity returns next year.

Heck, big-money investors almost have no choice but to allocate more heavily toward emerging markets in 2015. The bull market in U.S. equities is aging rapidly. Sure, there’s no law that says a bull can’t run for six years or more, but based on past performance, it’s unlikely. Furthermore, U.S. stocks may not exactly be overpriced, but they’re not cheap either.

At the same time, European bourses aren’t all that attractive these days either. True, they’re cheap, but they’re cheap for a reason. Russia’s stealth invasion of Ukraine and no real economic recovery to speak of makes Europe a long shot for 2015.

Investors will have to be more selective with their emerging markets bets next year — they’re all charting different courses now more than ever — but the growth is still there. That promises to make for a much better risk-reward balance for emerging markets in 2015.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/11/emerging-markets-outlook/.

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